Monday, August 18, 2014

Small Investors Just Proved Why Fed’s ‘Wealth Effect’ Is Bogus by Wolf Richter

The American public is astute about a lot of things, but the
stock market – despite all the hoopla in the media and even on NPR –
apparently isn’t one of them. That’s what the Wells Fargo/Gallup
Investor and Retirement Optimism Index survey found.

And it raises some thorny issues about the Fed’s strategy to print a
few trillion dollars and force interest rates down to near zero in
order, as it said, to inflate stocks and other financial assets, thereby
triggering the “wealth effect,” which would stimulate the Main Street
economy. This is, of course, precisely what has not happened. And the American investing public just told us why.

The survey
asked American investors with $10,000 or more in stocks, bonds, mutual
funds, or in a self-directed IRA or 401(k) – so not the entire American
public but only those who have a stake in the markets – to comment on a
number of basic topics, but here’s the one that stuck out the most:

As far as you know, how did US stocks perform on average in 2013 – did they increase in value, stay about the same, or decrease?

(If increased): Which of the following do you think comes closest to
the overall increase in the US stock market in 2013 – was it up 10%,
20%, 30%, 40%, or 50%?

It so happened that in 2013, the S&P 500 chalked up a total
return, including dividends, of over 32%. It was the most phenomenal
year since 1997, when it had zoomed up 33%. So it’s not exactly a common
event. And it should have entered into the consciousness of the
investing public who’d presumably benefitted from it. But it didn’t.

A mere 7% of the investors got it right.
One can only imagine how the overall American public, including the
tens of millions of folks who’re just scraping by and have zero stake in
the financial markets, would have performed on the pop quiz.

To their credit, 64% of the investing public believed that there had
been at least some gains, even if way below the actual gains, with the
bulge bracket (37%) figuring that stocks had gained 10% in 2013. But 21%
thought stocks had remained flat, and 9% of the investors thought
stocks had declined!

The survey made clear to the respondents that it was about the stock
market, not their personal portfolio. But could people really
distinguish? Wouldn’t it impact their judgment about the overall market
if their 401(k) had been whittled away by fees and bad decisions whose
holes weren’t papered over with new contributions? Maybe. But in the
statistics, they would have been overpowered by the other investors who
watched their statements gain weight during the course of the year.

So then the survey asked directly how knowledgeable they were about
investing in the market. Thankfully, only 11% described themselves as
“highly knowledgeable,” but 56% thought they were “somewhat
knowledgeable” though almost none of them could pinpoint one of the most
basic facts of investing, namely how much stocks had soared last year.
And 33% were honest, considering themselves “not knowledgeable.”

Whatever this survey says about American investors with more than
$10,000 in the financial markets, it speaks volumes about the Fed’s
favorite policy goal, the “wealth effect.”

The Fed claimed that by inflating asset prices, it would make Americans feel
wealthier, and thus induce them to spend more money, which would crank
up the Main Street economy and solve all problems. OK, sales of luxury
goods, expensive cars, corporate jets, yachts, and the like responded
very well. Sales of other goods not so much.

Why? Because the majority of Americans didn’t benefit at all from
rising stock and bond prices because they had no stake in the markets;
they were busy trying to find jobs and make ends meet. And even most of
those who benefited from the rising stock prices by having a stake in
the markets weren’t sufficiently aware of it, or weren’t aware of it at
all, according to the survey. Maybe they simply didn’t have enough money
in the markets to make a real difference in their lives.

The Fed has known about this all along. It knew that the wealth
effect would do nothing or very little for most Americans who were much
more impacted by the concomitant reduction in real wages. It knew that
that the wealth effect would do nothing to crank up the Main Street
economy. For the Fed, it was just a pretext for engineering the greatest
wealth transfer of all times and for whatever other goals it wanted to
accomplish. And America’s investing public just pointed that out again.

And the fact that most investors are in the fog about the markets
they invest in, the risks and rewards they face, the rip-offs they
encounter, the fees they pay… is the reason Wall Street gets away with
its game for as long as it does.

Pennsylvania Governor Tom Corbett, NYPL President Tony Marx, and
National Constitution Chairman Jeb Bush examine the Library's original
copy of the Bill of Rights.

Credit: Julie StapenMAY 22 – Members of the public in both New York City
and Pennsylvania will soon get to see The New York Public Library’s
original copy of the Bill of Rights, which will be exhibited for the
first time in decades.

The Library and the Commonwealth of
Pennsylvania today announced an agreement to share display of the
national treasure, which has been preserved in The New York Public
Library’s collections since 1896. The document will go on public display
alternately at The New York Public Library and in Pennsylvania
beginning in fall 2014 (the year marks the 225th anniversary of the
document being drafted and proposed by Congress).

[sidebar:
The Federal Reserve System (Fed} has been around long enough to test
the baptism via fire. We know in the United States, those that have
been fried again and again, how to pay attention to the burning while
the fires rage-rage against the sanity of reality. The Fed makes up
debt and sells this to the Americans via the government that is the
Fed's "agents" for the obvious. Stocks. The human beings in the USA
are stock options and that's all folks. Get out of line in the stock
option conveyor belt and bye-bye you're nothing but, a slab of gone
flesh into the fire of cremation. Lots of humans were born for this,
read the BIBLE that was and is written by those that own the Fed.
GENERAL WELFARE. That was what the U.S. Constitution said is the GOOD
LAW, just one small protective force. But, the Fed stole the right for
the USA to be "sovereign". Now that was definitely not legal, but the
stock in the USA are conditioned now to bank on the criminal fraud.
Stocks of dumb animals are simply stocks of dumb animals